By Marek Fuchs
With a dour Dick Bove, the revered financial sector analyst, sounding warnings on Tuesday over the upcoming bank earnings season and certain banks - yes, JP Morgan (JPM), I’m looking at you - leaking like a sieve about a settlement wiping out their earnings, prevailing thought on the start of the third quarter earnings season for banks has rarely been worse.
Among the words Investor's Business Daily used in its bank earnings preview article besides "JPMorgan," "Wells Fargo" and "Earnings" were "Litigation” and “Layoffs." Ouch. Meanwhile, when they are not talking down bank earnings, the media has been busy recasting Jamie Dimon, crossing him over from icon to fall-boy. Ye Gads. Grim times.
Will we even survive third quarter bank earnings season, which started on Friday with reports from JP Morgan -- which reported as expected, but is tilting slightly more than last week -- and Wells Fargo (WFC), and continues apace next week with Citigroup (C), Bank of America (BAC), Goldman Sachs (GS) and Morgan Stanley (MS) weighing in?
When one of the more positive preview headlines actually deploys the phrase “So-So,” you have to sit up and wonder.
Granted, coverage should be somewhat muted. Economically, we've steered into a nasty patch of weather. The banks are obviously sensitive to that. But if you look hard, you can see that the media – and, by extension, traders – are overreacting by a length.
The macro picture is not helping the mood. But are all systems really down? Even as fears of a United States default are increasing, the media has given up the United States economy altogether, which is rubbing off on perceptions of the banks. Jim Cramer, never prone to understatement, published a failed debt deal “survival guide.” Too much? At least that was a characteristically emotional take.
But CNNMoney.com, normally more staid, actually ran a general earnings season story which started by saying the federal government is not the only “threat” to the stock market and soon threw around the words “kill” and “trap.” Next time tell us how you really feel.
Look, the Washington mess is hardly good news. That said, media elation or (in this case) panic is a contrary indicator and this one is flashing bright red.
Moreover, the banks are hardly a fixed block. In its haste to shout warnings to the skies, the media has failed to draw distinctions. Those distinctions will probably become a bit more visible over the next few weeks.
We already know the bad news
Even assuming that fixed-income trading and mortgage refinancing revenue have slowed considerably, for example, mortgage rates did drop at the tail end of the quarter. We already know about all the gory bad stuff, which has mostly been reflected in bank earnings numbers which were guided down in a big way. In fact, the recent vintage and absolute certainty of the reduced guidance minimizes the chance for downside surprise. Only two weeks ago, a Sanford Bernstein analyst, in lowering earnings estimates on a number of banks, referred to “a full-scale rout” in trading. Days later, can we possibly hear worse?
When it comes to trading, anything is possible. But that subtle turn in mortgage rates, a more reliable variable, was not generally reflected in the headlong rush to lower numbers and smash mouth the sector and might just have a positive – though admittedly measured – impact.
On the subject of subtle distinctions between the financials themselves, the media has also been pulling up short. In their haste to warn traders away from financials with the use of active death verbs, the media is not, say, pointing out that while Goldman Sachs is particularly vulnerable to trading, Morgan Stanley’s retail brokerage arm compensated somewhat.
Just one quarter
Beyond the particularities of each financial, the media and traders, in trafficking it rhetoric about “routs” and “traps” seem to be forgetting that one quarter does not the future make. In other words, between tapering concerns and the spontaneous combustion of good sense in Washington, there has rarely been a more disruptive quarter. But memories are short and what the interest rate and currency gods taketh, they tend to give back. That’s why outright panic is probably misplaced.
Since the early days of the financial crisis, the curtain hasn’t been opened on a bank earnings season with more trepidation. It is reminiscent of the old joke about the telegram from the pessimist: “Start Worrying. Details to Follow.” There is cause for concern, but is this utter state of panic appropriate? Don’t bank on it.
Marek Fuchs was a stockbroker for Shearson Lehman Brothers before becoming a journalist who wrote The New York Times' County Lines column for six years. Fuchs speaks regularly on business and journalism issues at venues ranging from annual meetings of the Society of American Business Editors and Writers to PBS to National Public Radio. His recent book, "Local Heroes: Portraits of American Volunteer Firefighters," earned widespread praise. He is on the writing faculty at Sarah Lawrence College. When Fuchs is not writing or teaching, he serves as a volunteer firefighter. You can contact him on Twitter: @MarekFuchs.